Digital payments: A game-changer for MSMEs

India has been adopting digital payments at a rapid pace over the last few years, and the pandemic further accelerated the use of various digital payment modes. Quite recently, the Ministry of Electronics and Information Technology (MeitY) recorded 8,193 crore digital transactions in FY22 (till 20th March 2022). That's a 47% jump from 5,554 crore digital transactions, which were clocked in for the whole of FY21. This showcases energetic participation from users, industry, as well as the Government in the digital ecosystem. The digital payments market is further expected to grow at a compound annual growth rate of 27 per cent during the FY20-25 period.  

As the digital payments ecosystem continues to grow in the country, with businesses and individuals adopting digital instruments such as Unified Payments Interface (UPI), Bharat QR, wallets, etc; the MSME industry has also begun to walk the talk on the digital payments initiative. We know for a fact that running a day-to-day business without backed-up records of digital transactions, the facility to accept digital payments, and a customer communication platform is a difficult chore, especially post a pandemic when E-commerce has expanded inexorably. Thus, MSMEs have increasingly recognized the importance of adopting digital technologies to reduce inconvenience to their customers and suppliers, bring down the administrative burden on their business, as well as minimize the risk of losing essential records, and digitizing payments is a necessary part of that story. 

Here are a few compelling reasons why digital payments can prove to be a game-changer for MSMEs: 

Streamlines everything: In the midst of the pandemic, every firm is using a more secure method of transacting and one that avoids the exchange of real cash. From shopping plazas to restaurants, businesses have evolved into smart stores, streamlining everything from customer orders to payment through a digital ecosystem. Not only does the availability of goods and services online and digital payments reduce the need for physical presence of the customer at the stores, but also assists businesses in effectively managing their transactions.

Improvement of cash flows and enhances cost-effectiveness: MSME digitalization has various advantages, including cash flow improvement, faster realization of funds and increased store cost-effectiveness. A computerized record of payment transactions will help to better understand spending patterns and also eliminate bad debts.

Brings down the risk of fraud: Every transaction within a digitized business ecosystem has a digital imprint and can be easily traced, in turn minimizing the risk of fraud. Furthermore, there is no risk of physically moving money from one location to another.

Improves operational efficiency: The administrative burden of managing manual cash transactions is reduced through digital payments, driving operational efficiency. Due to the elimination of numerous administrative duties such as keeping notes of manual orders, managing cash, and post-sale follow-up, businesses can instead focus on offering specialized solutions to customers, in turn giving them a competitive advantage over non-digitized businesses.

Enables easy access to credit: India's nearly 27-29 million MSMEs lack credit access. Simply put, they cannot avail of loans to support their business due to the fact that such businesses lack proper financial records, credit history, collateral, etc. Thus, lenders are unable to evaluate their repayment ability and are hesitant to provide credit. It eventually leads to a lack of access to additional funds or high-cost loans, both of which are detrimental to MSMEs. However, having a digital footprint serves as a great solution to this problem as it helps the lenders in determining the borrower's credibility.

The digital payment ecosystem can undoubtedly unlock massive value for MSMEs by helping them expand their customer base, improving cash flows through the faster realization of funds, providing upsell opportunities, reducing costs, and creating a digital footprint that would enable easy access to credit at cheaper rates.With this, one thing is certain: The MSME that is backed by an adequate digital payments infrastructure is well-positioned to embrace opportunities and gain an advantage over its competitors.

Source : The Times of India